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Flashcards · YBS11 · AS Topic 2

Managing business activities (AS Level) flashcards

40 cards on AS Topic 2, subtopics 2.3.1 to 2.3.3. Pick a subtopic or study them all.

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2.3.1 Planning a business and raising finance

Business plan: definition and contents
A written document setting out the aims, market, operations and finances of a business and the finance it needs. Contents: idea and aims, market research, marketing plan, operations, owners and managers, financial forecasts.
Uses of a business plan
Inside: test the idea, set targets, compare actual results with the plan. Outside: persuade banks and investors to provide finance, by showing what is needed and how it will be repaid.
Three internal sources of finance
Owner's capital (personal savings), retained profit, and sale of assets.
Retained profit: advantages and drawback
No interest and no outside control. But a new or loss-making business has none, and it builds up slowly.
Source vs method of finance
A source is who provides the money (e.g. a bank, business angel, family). A method is the form it takes (e.g. a loan or an overdraft from a bank).
Business angel vs venture capital
Business angel: a wealthy individual who invests for a share and may advise. Venture capital: a specialist firm that buys shares in a risky, high-growth business.
Crowd funding and peer-to-peer funding
Crowd funding: many small contributions raised online, often for consumer products that attract public interest. Peer-to-peer: individuals lend to a business through an online platform, an alternative to a bank.
Loan vs overdraft
Loan: a fixed sum with interest and set repayments; suits long-term purchases. Overdraft: borrow up to a limit, flexible, interest only on what is used but costly; suits short-term cash gaps.
Share capital vs loan
Share capital gives investors ownership and needs no repayment or interest, but dilutes control. A loan gives no ownership but must be repaid with interest.
Dilution: an owner holds 70 of 100 shares and 30 new shares are sold. New stake?
70 ÷ 130 = 53.8%. Ownership is diluted, but the company has gained funds.
Leasing, trade credit and grants
Leasing: use an asset without owning it, with regular payments. Trade credit: pay the supplier later; finances everyday inventory. Grants: often non-repayable, but conditions apply.
Unlimited vs limited liability
Unlimited: the owner is personally responsible for all business debts (sole traders, partners generally). Limited: a shareholder's loss is limited to the amount invested (Ltd and plc shareholders).
Private limited company (Ltd) vs public limited company (plc)
A Ltd may not sell its shares to the public; shares go to chosen investors. A plc may sell shares to the public, raising large capital but with more cost, disclosure and takeover risk.
Franchise, social enterprise and lifestyle business
Franchise: pay a fee (often a share of revenue) to use a brand and system. Social enterprise: trades to meet social or environmental aims and reinvests most profit. Lifestyle business: run for a chosen way of life, with little wish to grow.

2.3.2 Financial planning

Sales revenue, total costs and average cost
Sales revenue = selling price × sales volume. Total costs = fixed costs + total variable costs. Average cost = total costs ÷ output.
Fixed vs variable costs
Fixed costs do not vary with output (e.g. rent). Variable costs vary with output (e.g. materials). Average cost falls as output rises because fixed costs are spread more widely.
Improving sales volume or revenue
Promotion, product improvement, wider distribution, or a price change. A price change moves volume and revenue per unit in opposite directions.
Sales forecasting: purpose and three factors that affect it
Purpose: a base for budgets and cash-flow forecasts, and for planning production, inventory and staffing. Factors: consumer trends, economic variables, actions of competitors.
Contribution per unit and break-even output: formulas
Contribution per unit = selling price − variable cost per unit. Break-even output = total fixed costs ÷ contribution per unit.
Price 24, variable cost 15, fixed costs 18,000. Break-even, and margin of safety at 2,600 units?
Contribution = 9. Break-even = 18,000 ÷ 9 = 2,000 units. Margin of safety = 2,600 − 2,000 = 600 units.
Margin of safety
Actual (or planned) output minus break-even output: how far sales can fall before a loss is made. Example: sales 4,000, break-even 3,000 → 1,000 units, or 25% of actual output.
Limitations of break-even analysis
Assumes all output is sold, constant price and variable cost per unit, and fixed costs that stay fixed; best for one product; relies on forecasts; ignores cash timing and competitor reactions.
Cash-flow forecast: layout
Each month: opening balance + inflows − outflows = closing balance (net cash flow = inflows − outflows). Next month's opening balance is this month's closing balance.
Uses of a cash-flow forecast
Spot shortages early, support borrowing requests, and time purchases.
Limitations of a cash-flow forecast
Forecast sales may be wrong; late payers and unplanned costs; it needs regular updates; it says nothing about profit.
Historical vs zero-based budgets
Historical: last period's figures adjusted; quick, but repeats old inefficiency. Zero-based: start from zero and justify every item; challenges waste, but slower.
Variance analysis: favourable vs adverse
Variance = actual − budget. Favourable raises profit; adverse lowers it. A cost above budget is adverse; revenue above budget is favourable. Example: cost budget 22,000, actual 24,200 → 2,200 adverse.

2.3.3 Managing finance

Gross profit, operating profit and profit for the year
Gross profit = revenue − cost of sales. Operating profit = gross profit − other operating expenses. Profit for the year (net profit) = operating profit − interest.
The three profit margins
Gross profit margin = gross profit ÷ revenue × 100. Operating profit margin = operating profit ÷ revenue × 100. Profit for the year margin = profit for the year ÷ revenue × 100.
Revenue 210,000; cost of sales 126,000; other operating expenses 52,500. Margins?
Gross profit 84,000 → gross margin 40%. Operating profit 84,000 − 52,500 = 31,500 → operating margin 15%.
Ways to improve profit margins
Raise prices; cut cost of sales (cheaper materials); cut other operating expenses; cut interest by repaying debt. Selling more raises profit but not always the margin.
Profit vs cash
Profit: revenue minus costs for a period, counted when earned or incurred. Cash: money actually received and paid, counted when it moves. Credit sales count as revenue at once but the cash arrives later.
How can a profitable business run out of cash?
By paying suppliers quickly, offering customers long credit and building up inventory, so cash leaves before it comes in. Wages and bills fall due on fixed dates whatever the profit.
Current ratio and acid test ratio
Current ratio = current assets ÷ current liabilities. Acid test ratio = (current assets − inventory) ÷ current liabilities.
Current assets 50,000 (inventory 32,000), current liabilities 40,000. Ratios?
Current ratio = 50,000 ÷ 40,000 = 1.25. Acid test = 18,000 ÷ 40,000 = 0.45: weak, because most current assets are inventory.
Working capital
Current assets − current liabilities: the funds for day-to-day running. Example: 55,000 − 38,000 = 17,000.
Four ways to improve liquidity, with a drawback each
Sell assets (lose their use); longer supplier credit (suppliers may refuse or raise prices); factoring (fee; customers deal with the factor); just in time inventory (depends on reliable suppliers).
Overtrading
Expanding output or sales faster than the business can fund the cash needed, so it runs short of cash even if profitable.
Internal causes of business failure
Poor management of cash flow, overestimation of sales, overtrading, poor inventory control, poor marketing, poor quality. These are within management's control.
External causes of business failure
Market conditions, competition, economic conditions, exchange rates, interest rates, government regulations, supplier problems, natural phenomena. Not controllable, but a firm can prepare for them.

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